How to kill a Kindle: Barnes & Noble’s digital playbook

Barnes & Noble is finally plunging into the e-book fray after realizing how much it stands to lose once Apple and Google join the exploding digital book business already championed by Amazon. But the dominant bookstore chain will need to master the e-commerce, social community and mobile networking skills of its rivals in order to succeed.

Clearly, some of the forecast numbers were enough to scare Barnes & Noble into action. The nascent e-readerbusiness could encompass four million such devices this year, and is expected to increase 51 percent annually to 32 million — one-third of the domestic book reading market — by 2014, according to Credit Suisse. By then, Kindle could own two-thirds of the e-reader market.

E-book sales remain a fraction of the $24 billion book market, which declined two percent last year while e-book sales grew 68 percent to $113 million in 2008, according to the Association for American Publishers. E-book sales will soar to 29 million or $9 billion in sales globally by 2013, according to In-Stat.

Over the next five years, more than one-third of today’s shrinking $10 billion trade book market will shift to the Kindle and other e-readers. They also are expected to make inroads into the $6.4 billion professional and scholarly publications market, the $5.2 billion grade K-12 elementary school market and the $5 billion university textbook market.

So while frequent readers and early tech adopters have been driving the early e-book sector, other catalysts soon will come into play. Consumers will demand e-reader access to more online blogs, newspapers and periodicals; publishers will turn to digital books as a “green” solution; and academics in China and the US will seek to make textbooks a leading e-reader killer app.

Despite all the hoopla, Kindle and e-book sales are still a marginal business for Amazon compared with its traditional book sales. Amazon expects to generate $35 million profits on $420 million in revenues in 2009 and as much as $721 million in profits on $4 billion in revenues by 2014. Even then, the e-book business would contribute less than 10 percent of Amazon’s overall revenues and profits, according to Credit Suisse.

By comparison, full participation in the e-book business eventually could be a life line for a brick-and-mortar bookseller like Barnes & Noble. Still, some investors are encouraging Barnes & Noble to protect its retail book sector dominance by acquiring Borders — which has nearly two million rewards customers and is experimenting with niche markets with the likes of its new Ink book shop for teens. Others argue that Borders’ real estate holdings will simply weigh down Barnes & Noble’s finances. “It will be difficult, if not impossible, for legacy brick-and-mortar chain bookstores to shed enough operational costs to profitably complete in the eBook space,” Forrester Research analyst Sarah Rotman Epps observes in a recent client report.

In any event, Barnes & Noble now has the opportunity to integrate the Web into every aspect of its storefront business to reinvigorate its business model. That will put Barnes & Noble in even more direct competition with the technologically adroit Amazon. In the end, brand will have less to do with either companies’ e-book success than building an online community of loyal customers, keeping prices competitive and creating a ubiquitous service suited to any device or platform. A platform war like the former VHS-Betamax contest would only frustrates consumer while wasting time and money. Still, Barnes & Noble has no plans to make its electronic book products compatible with Amazon’s Kindle.

As with other rival e-readers from the likes of Sony and First Paper, Barnes & Noble plans for its e-reader service to be compatible with the iPhone and iPod Touch, Blackberries and most Mac and Microsoft Windows laptops or desktop computers. Users will also have free access to Google’s out-of-copyright works, which it is seeking to legally broaden to include more current books. To help make sense of the complicated and competitive e-book and e-reader market, Forrester Research has created a handy scorecard.

U.S. consumers, who bought $5 billion books online in 2008, are adopting technology to develop new reading habits and shopping expectations. Although Barnes & Noble is hoping to best Amazon by offering more than three times as many e-book titles for sale online for the same $9.99 download price, it needs to pay attention to details. It will be no small feat for Barnes & Noble to match the efficiency and personalization of Amazon’s well-oiled e-commerce machine.

While some analysts suggest that Barnes & Noble can outdo Amazon’s Kindle by pricing its e-book reader lower than $299 and giving it new features such as a backlit screen, digital consumers clearly are making decisions about online products and services based on the entire package.

With that in mind, here is some of what Barnes & Noble must do to become a formidable e-book player: